MF Global, leading broker-dealer firms providing customized trading and hedging solutions in commodities, listed options and futures, equities, fixed income securities and foreign exchange. The company announced a filing under Chapter 11 of the U.S Bankruptcy Code with the United States Bankruptcy Court for the Southern District on 31 October 2011. The board of directors approved this Chapter 11 petition in order to protect their assets. By fact, this is the biggest US casualty of Europe’s debt crisis and the seventh largest bankruptcy by assets in US history. In particular, the company strived to revive by hiring restructuring and merger advisers for a bid from potential buyer ‘Interactive Brokers’ under the court supervised auctions.
So, what went wrong? The company has initially been suffering from low interest and bets it made on European sovereign debt. MF Global basically went for what would be a very profitable trade with European sovereign debt that obviously has blown up in their face and brought the company down. Interestingly, impulsive risk-appetite of MF Global Chief Executive Officer with the company’s own money has shown the similar risk behavior that we have seen before Financial Crisis 2008-9 in proprietary trading from major investment houses such as Goldman Sachs, JP Morgan, Citi Group and Morgan Stanley, this has subsequently slashed the company value by -67.39% (graph shown below) and with credit rating cut to junk by Fitch Rating from BBB to BB + and Moody from Baa2 to Baa3, one level above the junk status. Bloomberg reports that Jon Corzine, CEO of MF Global Holding had been placing additionally increasing position in the debt of Italy, Spain, Belgium, Portugal and Ireland from a year ago according to company’s presentation.
Due to uncertainty over Wall Street’s exposure in sovereign debt in Europe, US regulators demanded to disclose the bets on debt issued by countries including Portugal, Ireland, Italy and Greece. MF Global particularly failed to comply with the US Commodity Future Trading Commission (CFTC) n in providing required data and records. Chief Operation Officer of MG Global Holding wrote in the filing that “Regulators had expressed ‘grave concerns’ about the viability of MF Global, which filed the bankruptcy after – no viable alternatives was available in the limited time leading up to the regulator’s deadline.” It is interesting to see MF Global COO fingers at regulators in the part of the statement in the filing that the bankruptcy process was quicken with the pressure from CFTC. It is evident that aggressive behavior in taking position of troubled economies has not been favoring the return on the position is being taken from the investment.
I am wondering whether the lesson from Lehman Brother’s collapse was taught MF Global Holdings. Traders, brokers in financial market envisioned two hundred years of MF Global Holdings as Mini Goldman Sachs as MF Global CEO worked at Goldman for four years. MF Global is generally known for highly leveraged and trying to do what he did at Goldman Sachs. But, the market went against him. Also, there are rumors that the senior management figures are expected to receive severance bonus. So, I say once again that there is price for everything, and in finance; there is no such free lunch. The potential loss is now in hand of local and international investors such as private equity firms where they hold the substantial number of shares of MF Global. However, I do not hope that global financial markets would not see Lehman Brothers type bankruptcy and stricter regulations should be considered to fill in the loophole and ethically serves the clients with clear and transparent objectives whereas MF Global Holdings was not particularly good at.
Further readings and must-watch item
Bloomberg
http://www.bloomberg.com/news/2011-10-31/mf-global-exposes-prop-trading-risk-that-volcker-wants-to-curb.html
http://www.bloomberg.com/news/2011-11-01/mf-global-probe-said-to-involve-hundreds-of-millions-in-funds.html
New Release by MF Global Holdings
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTEzMTY2fENoaWxkSUQ9LTF8VHlwZT0z&t=1
Video of MF Global files for bankruptcy- http://www.youtube.com/watch?v=yVcvh2O1ykU
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